Ingersoll-Rand (India) (NSE:INGERRAND) Knows How To Allocate Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Ingersoll-Rand (India) (NSE:INGERRAND) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Ingersoll-Rand (India) is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.45 = ₹2.6b ÷ (₹8.6b - ₹2.8b) (Based on the trailing twelve months to June 2023).

Therefore, Ingersoll-Rand (India) has an ROCE of 45%. In absolute terms that's a great return and it's even better than the Machinery industry average of 17%.

View our latest analysis for Ingersoll-Rand (India)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Ingersoll-Rand (India), check out these free graphs here.

What Does the ROCE Trend For Ingersoll-Rand (India) Tell Us?

Ingersoll-Rand (India) has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 492%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 48% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 32% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Ingersoll-Rand (India)'s ROCE

In a nutshell, we're pleased to see that Ingersoll-Rand (India) has been able to generate higher returns from less capital. And a remarkable 444% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Ingersoll-Rand (India) can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Ingersoll-Rand (India) you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.